Here’s a scenario nearly everyone finds themselves in at some point in this line of work:
You’re psyched about a new product or feature in the works. You’ve got requirements, design vision, and even a development timeline. You’ve got feedback from potential buyers and they love it. You’re ready to roll, and then you’re asked, “So how much money will this make?”
And all you can say is, “Um…”
It’s happened to the best of us; committing to a revenue projection is one of the trickiest parts of product management. If you knew how much money any given new thing would make, you’d be running a hedge fund instead of a product team, right?
Just think about what’s wrapped up in that revenue projection number:
- The price you’re going to charge
- How quickly salespeople will be selling it
- How long sales cycles will be
- What percentage will convert
- What percentage will churn
Pricing is a big challenge on its own, but the other factors listed above also require you to make assumptions. They all affect each other too. This is where classic mistakes happen.
Product managers may like to take a top-down look at the market and say “we’ll get 10% of that” with little justification for it. Or worse, they figure out the number that will get the business case approved and go with that. Soon, others make projections based on your brittle projections, and the cycle of abuse continues.
What’s needed in this situation is a way to have a numbers-based conversation that is based on reality. Here’s how you can do it when you’re strapped for data.
Build a Revenue Projection From the Bottom up
What you need is a way to provide a realistic revenue possibility while leaving room for uncertainty. To do that, you will need to break down your customers’ purchase funnel step by step so that you can make realistic assumptions about the success of each stage. Here’s how that might look for a typical enterprise product:
- How many people can you put this product in front of in Year 1?
- What % of them will take a sales call or sign up for a trial?
- Of those, what % will convert to paying users?
- Of the paying users, what do you expect to be the average life span?
- Over that period, what % of them will buy other products/services from you?
- How much on average will they spend on those?
You can put the numbers into your funnel, and see what that yields in terms of annual spend per customer.
The critical thing is to call out each of your assumptions and work out how you got there. This means you can have a productive conversation with stakeholders about the model and get good feedback.
Your first cut at your model should be the base case – what you realistically think could happen with good execution. Then lay out a low and high adoption scenario, adjusting the appropriate parameters in your revenue waterfall up or down.
Key takeaway: it’s easier and more useful to make many small assumptions rather than one big one. This is how you take a bottom-up approach to a revenue projection.
(Note: A product that will be an up-sell to existing customers will obviously have a different funnel than a brand-new product, so this may look different depending on your situation. The key is to capture the drivers of incremental revenue, and put in realistic parameters.)
Example below shows the revenue waterfall for a new product
A Solid Revenue Model Helps set Goals Elsewhere in the Business
This revenue projection model can be a good tool for stakeholder communication. You can’t talk about revenue targets without discussing how you’re going to get the product into people’s hands. One big benefit of breaking out the individual revenue drivers for your product this way is that it shows you how to set goals throughout the sales and marketing funnel.
For instance, if you need to get the product in front of 10,000 people, you can set goals for conference sponsorships, email campaigns, and the other lead generation tactics you employ. Setting clear marketing goals helps the responsible teams to prioritize spend and think in concrete terms about ROI.
Similarly, the revenue projection should help you to prioritize the important questions to make the projection happen. For example:
- When will salespeople get trained and by whom in order to meet the target you set?
- Will this new product be added to the onboarding process for new employees?
- What materials will you and others create to make onboarding easy (sales scripts, tutorials, one-sheeters, etc.)? Same goes for customer support.
- How do you plan to introduce this product?
When you do it right, the revenue projection shouldn’t just be a number in a business case. It should be the thing that helps everyone align priorities and start attacking the to-do list.